Gold Resource Corporation (GORO) has recently slashed its dividend by 50%. The stock opened lower on the day of the news, but managed to gain 2.5% at the end of the day. This move from GORO raises two interesting questions. Is there a risk of dividend slashing in other gold stocks (GDX)? How would such possible dividend reductions affect stock prices?
Let us first examine the rationale behind the decrease in the dividend. Gold Resource Corporation's President, Mr. Jason Reid, stated: "Multiple factors contributed to the decision to decrease monthly dividend distributions." The first factor is the recent market pullback in the spot price of gold and silver, which may reduce GORO's future net revenues. This factor is common to all gold miners. Other factors that brought the decision to life are stock-specific. GORO wants more money to flow into the expansion of its El Aguila Mill. Also, the company has a long-term target of one-third annual dividend distribution from cash flow from mine site operations. The decision to slash the dividend brings the payout ratio closer to the target.
What possible factors could influence other gold miners to cut dividends? In my opinion, main factors that could force gold companies to make such a decision are their debt and liquidity levels. If a company needs additional money, one of the easiest ways to deal with the problem is to eliminate the dividend. I would like to present you a table of twelve gold miners with the biggest market capitalization. These companies are Goldcorp (GG), Barrick Gold (ABX), Newmont Mining (NEM), Yamana Gold (AUY), Randgold Resources (GOLD), AngloGold Ashanti (AU), Kinross Gold (KGC), Compania de Minas Buenaventura (BVN), Gold Fields (GFI), Eldorado Gold (EGO), Agnico-Eagle Mines (AEM) and Harmony Gold Mining (HMY).
(data sourced from Yahoo! Finance)
How would we find the primary group of stocks worthy of further investigation? I would search for stocks that have less liquidity and more debt at the same time. The stocks that fall under these criteria are ABX, NEM, AU and GFI. These would be our primary candidates for further investigation.
ABX recently reported its first quarter earnings, beating analyst estimates by 4.5%. The company is experiencing problems with its Pascua-Lima project due to the environmental requirements from Chilean government. In the earnings report, the company states that in the current market for gold and copper prices it expects to generate negative free cash flow in 2013. The company plans to issue long-term debt securities in the near term to improve liquidity. The company states that one of the options to improve liquidity is to modify its dividend policy. I think that high debt level, project problems and liquidity constraints present significant risks to ABX dividends.
NEM has also released its first quarter results, and those results were moderate. NEM's dividend is linked to gold prices. Should the prices fall, the dividend would fall too, and vice versa. This is a good policy, because you know what to expect. Your dividend does not depend so much on the board's decision.
AU is yet to release its first quarter earnings. The stock was recently downgraded by Goldman Sachs (GS). GS states that AU is likely to require restructuring of some sort in 2013 and 2014. GS added that it believes any attempts to reduce costs by reducing labou and closing mines could be met with industrial action or government interference. AU had already had problems with strikes and workers damaging surface installations. I think that in the current environment even a miniscule 1.00% yield is in danger.
GFI has recently separated its mature underground mines in South Africa. They are now held by Sibanye Gold, which was downgraded by GS too. In its annual report, GFI states that it has increased emphasis on the delivery of dividends. In my opinion, the risks of dividend reduction by GFI are low.
Let's evaluate other companies from the list. GG's first quarter report came worse than expected, missing analyst estimates by 20.5%. Nevertheless, there are no signs that indicate GG would need additional liquidity, thus posing a threat of cutting the dividend. AUY had missed estimates too, reporting earnings 11.1% below expectations. Small level of long-term debt and normal liquidity mean that AUY's dividend is not under the risk of reduction. GOLD reported its earnings, too. Shareholders have approved a 25% increase in the dividend, so a cut seems unlikely. The company has the most liquidity and the least debt in our list. The dividend yield is still small. I think that dividend could be subject to upward reduction in the future, if the gold prices stabilize at more comfortable levels. KGC has reported results of a pre-feasibility study on the Tasiast expansion. The results were encouraging, and the company decided to continue with a feasibility study. This news is unlikely to affect dividends. BVN has a low debt level and no news that could impact the dividend too. EGO has the second best current ratio in this list of stocks and is unlikely to run out of liquidity any time soon. AEM has recently declared and confirmed its quarterly dividend. AEM has declared a cash dividend for 31 consecutive years. There is nothing that points that this would change in the near future. HMY has recently missed earnings estimates and continued to drop. Its share price has dropped below the $5 mark. However, HMY has strong liquidity levels. I believe that the dividend is out of danger for now.
Let's turn to the second question that was posed at the beginning of this article. I think that dividend cutting would not harm stock prices. GORO is the example of this assumption. Gold miners are extremely volatile now. Intraday movements in these stocks can easily exceed the size of the dividend yield. The dividend yield is a pleasant bonus to shareholders. However, I think that the main profit would come from the increase in stock prices of gold mining stocks when the situation stabilizes, gold prices settle at more comfortable levels and the panic vanishes. When buying gold stocks, an investor must focus on the valuation of the gold miners and not on the dividend yield.